Thursday, November 30, 2017
4:24:49 PM EDT

Market Goes Ballistic On Tax Reform

by
Thomas Hughes

The major indices all gained more than 1% on news the Senate version of tax reform would soon be passed. Specifically, there is word that hold-out Senator John McCain has given his thumbs up and paving the way toward passage. The next step is for the House and Senate to come together on a joint bill that can be put before the President for signing.

Asian markets were a little mixed as weakness in tech continues to plague indices. Japan closed higher by roughly 0.50% but was the only one to close in the green. Hong Kong led with a fall near -1.5% followed closely by South Korea. European indices were also mostly lower as traders eye data, political woe at home and the possibility of tax reform here in the U.S. The FTSE led with a loss near -0.90% as recent strength in the pound weighs on prices.

Market Statistics

Futures were up and edging higher all morning. The trade was indicative of gains near 0.33% by the opening bell. The SPX opened as expected and at new all time highs, it then proceeded to trend sideways for the next couple of hours before news began to hit the market. By 11:30 the indices were moving higher and setting new all time highs, and then moving higher again as it seemed more and more likely a Senate tax bill would pass. By 1PM the SPX was roughly 1.15% above yesterday's close and just shy of the 2,660 level. This turned out to be a near term top and capped gains into the afternoon. The indices sold off from their peak all afternoon to close well off the highs but still at new all time highs.

Economic Calendar

The Economy

The tax reform news was good and overshadowed a round of good but not overly exciting economic data. On the jobs front initial claims fell -2,000 from an upward revision of 1,000 to hit 238,000. The 4 week moving average of claims rose 2,250 to hit 242,250. Not adjusted claims fell -18.5% versus an expectation of -17.7% and are down -10% YOY. There is still some volatility in the numbers post-hurricanes but the data remains consistent with long term labor market trends. Puerto Rico reports that it has processed its backlog, the Virgin Islands is still dealing with theirs.

Continuing claims jump 42,000 to hit 1.957 million and its highest level since the storms passed through. The last week's data was revised up by 11,000 for a net gain of 53,000, the four week moving average increased 18,250 to hit to 1.911 million. Despite the gains continuing claims remain low relative to long term trends, near 44 year lows and consistent with labor market health.

The total number of claims jumped by 108,176 to hit 1.761 million and the highest level since early September. The jump is not unexpected and is consistent with seasonal trends. On a long term basis this week's figure is -7.5% from the same time last year and consistent with ongoing labor market recovery.

Personal Income and Spending show sustained and moderate growth in both income and spending. Income rose 0.4% and a tenth hotter than expected while spending rose 0.3% and as expected. On the inflation side PCE came in as expected and under the 2.0% target rate but shows a noticeable increase over the past 2 months that could be telling. Month to month PCE prices grew by 0.1% headline and 0.2% core; YOY PCE prices grew 1.6% headline and 1.4% at the core. While these do not alter expectation for rate hike at the December FOMC meeting (100%) they have helped increase outlook for another hike before mid 2018.

Chicago PMI came in at 63.9% for November and is the 21st month of positive reading. The index shows moderate to strong activity in the region although it did cool a bit from last months multi-year high. All sub indexes were positive, employment moving above 50 after falling below last month, with notable gains in deliveries and inventories. Deliveries increased at their fastest pace in 13 years while inventories is sitting at an 8 month high.

The Dollar Index

The Dollar Index fell in today's trade despite positive data. The move is due to equally positive data from the EU and elsewhere that has served to undermine dollar strength. The index is moving sideways within a trading range and likely to do so over the next two weeks, up to and until December 13th.. December 13th marks the start of a 2 day period in which the ECB, BOE and FOMC are scheduled to make policy statements within 24 hours of each other.

Today's action saw the index shed -0.40% in a move that tested both support and resistance. The index created a medium bodied red candle with visible upper and lower shadows, indicative of support and resistance. Today's action is the 6th in a row of trading at this level, near the mid-point of a short term trading range, and suggests prices could remain at or near this level.

The Gold Index

Gold prices sank even as the dollar lost ground on hopes the Senate would pass their tax bill. Spot prices fell about -0.75% to break below the $1280 support and trade near the $1,275 level. Even so, gold remains range bound within a tight near term range. Support has been near $1,270 over the past 6 week's and may continue to hold until the central bank meetings next month. Tax reform is a big catalyst too but not a done deal until signed by the President.

The Gold Miners ETF GDX fell more than -0.60% to create a small doji like candle below the $22.50 support line and at the bottom of the 1 month congestion band. This band is consistent with a wind up in gold and the dollar occurring ahead of the next FOMC meeting and may dominated trading over the next 2 weeks. Support is near $22.50 and the bottom of today's candle, a break below here would be bearish with a possible target near $21.00. A bounce from support may be bullish but would face resistance near $23 and the long term moving average.

The Oil Index

Oil prices held steady while OPEC members hold their semiannual meeting in Vienna. The bloc along with partner in crime Russia have agreed to extend the production cap until the end of 2018 as expected. The group says they'll come back in June to discuss production levels at their regularly scheduled meeting. Nigeria and Libya, two nations exempt from the cut, have reportedly agreed to expand production above 2017 levels. This news was balanced by rising rig counts, high storage levels and tepid demand to leave WTI trading near $57.30 and UNCH from yesterday's settlement.

The Oil Index is moving back to retest the recently set long term high. The index gained more than 1% in an extension of yesterday's bounce from support and looks like it will move higher. This move is being driven by forward earnings outlook and the idea that estimates may be too low. The indicators are both in support of this move although MACD has yet to confirm. Stochastic is pointing higher after firing a trend following bullish crossover with plenty of room to run. Upside target is the current high near 1,290 and then 1,300. With OPEC in support of production caps and global demand slowly picking up the question now is how much oil can the rest of the world pump?

In The News, Story Stocks and Earnings

Shares of Sears jumped more than 25% in the early hours on better than expected earnings. The jump in share prices did not last though, traders and investors seized this opportunity to sell shares leaving it down for the day at the close of trading. The once king of shop-at-home services beat EPS estimates by $1.82, the bad news of course is that the company posted a loss of -$2.64 anyway. Revenue missed estimates by only marginally, the news there is that it fell more than -27% YOY. The decline is due to a massive drop in comp store sales, -15.3%, the CEO Eddie Lambert is still trying to fix. My suggestion, offer Sears to Amazon, they seem to want a physical presence now. Sears is a great big store, has a nationwide footprint and is already well known for mail-order and delivery.

Costco gained 3.75% on a double shot of good news. First, the store chain released November sales data and the numbers are more than good. Revenues grew 13.4% YOY and came in well above expectations and driven on double digit gains in comp store sales. Total comps came in at 10.8% with 10.2% in the US and 13..8% in Canada, analysts had been expecting in the range of 7%. Even excluding gasoline sales total comps were nearly 8% and well above expectations.

Ambarella, notable for its association with GoPro among others, reported after the bell. The maker of HD semiconductors reported a double digit decline in revenue from the previous year but managed to beat estimates for revenue and EPS. Balancing this is YTD figures which show both revenue and earnings up from the last year. Forward guidance was also slightly above expectations and drove the stock 5% higher in after hours trading.

The Indices

The indices moved higher in a broad rally today although there were standouts in terms of leader and laggard. The leader is the Dow Jones Transportation Average with a gain of 2.00%. I have to say that when I first looked at this chart I had wow moment, even with the bullish signals/bounce from the long term trend line this is the kind of move that grabs your attention. The index created a long green bodied candle, the third in a row of three that may be considered Three White Soldiers and a sign of strength. This move is trend following, begins at a firm level of long term support and is confirmed by the indicators so I would expect to see it continue in the near to short term. Oh, and the index set another new all time high.

The Dow Jones Industrial Average posted the second largest gain, near 1.25%. The blue chips created a long green bodied candle in an extension of gains begun earlier this week. The index is moving up from the short term moving average with strength and set another new all time high. The indicators are both bullish, pointing higher and showing some strength so I would expect to see this move continue higher. Next target is 24,800 to 25,000.

The S&P 500 gained more than 1% to set another new all time high. The index created a medium/long green bodied candle with some visible upper shadow but does not appear to have hit any form of major resistance. The indicators are both bullish and pointing higher so I would expect to see prices contiue to move up. The caveat is that stochastic is a bit mixed with %K pointing lower and consistent with a touch to resistance. Now that 2,600 is broken next target is 2,700.

The NASDAQ Composite is today's laggard with a gain of only 0.5%. The tech heavy index moved higher but did not set a new all time high. This action is alarming as appears to confirm yesterday's Dark Cloud Cover and the idea of consolidation/correction. The indicators are both consistent with such a move, rolling over from bullish peaks and pointing lower, although strong bearish signals are absent. A move lower may find support at the short term moving average. A move up would be bullish and trend following with target at the current all time high.

The markets are moving and they are moving higher. These moves are supported by economic trends, earnings expectations and hopes tax reform will pass and pass quickly. The only thing standing in the way now it seems is expectations; the market is melting up on expectations and may soon become overextended. If tax reform gets delayed, if the data weakens, if the FOMC turns dovish or geopolitical fear flare up again we could see correction. That being said I'm still bullish and looking for the market to move higher. Final thought; if the transports lead the market they are giving off one heck of a signal.